A response to my last post on Mindjet’s flawed and ultimately unsuccessful attempt to move its entire user base to a subscription model asked whether even major companies such as Adobe will ever succeed in convincing their customers to rent rather than purchase their software outright, especially in an era in which major businesses often hang on to operating systems and software for years before upgrading.
I don’t know the answer to that question but I think that for many “traditional” software companies it may be a case of being stuck between a rock and a hard place. If they attempt to move to a subscription model they run the risk of losing customers who either dislike on principle the concept of renting software or who don’t want to pay the higher net costs of subscribing, compared to purchasing an upgrade only every five years or so.
On the other hand if they stay with the perpetual licence model they also run the risk of losing custom to cheaper alternatives, for example the developers of new mobile apps and online service providers. These may not offer the same range of features and may also involve subscriptions, but they often perform better at core tasks and the subscription costs are substantially cheaper (in some cases perhaps unrealistically cheaper).
This started me wondering about how and in what circumstances subscriptions are likely to succeed, especially for those companies that are moving into this space for the first time. I don’t pretend to be an expert on this, but as an interested software consumer here is my take on some of the questions these companies should be asking:
- How relevant or useful is a subscription model for the product? The subscription approach seems to be a better “fit” for some products than others. Consumers seem to find purchasing subscriptions for products that are inherently web-based or more easily used online (for example web-based collaboration tools and cloud storage) to be much more acceptable than the application of the subscription model to specialist programs that are PC-based, especially those that are heavily graphics or CPU-intensive.
- Where are the files and data produced with the software stored? Related to the issue of the nature of the software service is the issue of where the outputs are stored. Again, if they are stored online, users seem to find subscriptions more acceptable. However, there seems to be strong resistance when files continue to be stored on the user’s computer; customers seem to resent the possibility that if they let their subscription lapse they will be unable to access their own data on their own computer. Many corporate users also have requirements regarding data security and access which makes them wary of subscription models.
- How accessible is the product and the associated data? If something is offered on a subscription basis, there is an expectation that it will be accessible across a range of devices and locations. There is also an expectation that it will be easy to get data into and out of the software; files should be able to be imported and exported easily. Apart from the obvious benefits this also helps to reassure users that if they let their subscription lapse – or if the company goes belly-up – they will still be able to access their data.
- Does the subscription price offer value for money? This is the critical area in which most attempts by “traditional” companies to move to subscriptions founder, because they base their pricing on what they have charged for perpetual licences and upgrades, with an assumption that users upgrade every time a new version comes out. This approach is flawed for two reasons:
- First, as noted earlier, many users with perpetual licences hang on to the same program for years, often skipping several upgrades, in order to reduce costs. This applies to particularly to many non-profit organisations as well as individuals, but it is also common practice in the corporate sector.
- Second, the rise of the low-cost app for mobile devices and the introduction of new products with very low subscription pricing by start-ups in the online arena not only has introduced direct competition for the core business of traditional software providers but also radically changed consumer expectations regarding what they are prepared to pay for subscriptions.
The upshot of the last point in particular is that many of the subscription charges sought by traditional companies are quite unrealistic. The company that comes closest to “getting” the subscription model is perhaps surprisingly Microsoft, which charges US$100 a year for a subscription for a full version of Office for five computers; the one that seems to have most misread its market and the new pricing climate is Mindjet which is still trying to charge a whopping US$360 a year for its business bundle for a single user.
Somewhere in between are companies like Adobe that are charging US$600 a year for the complete suite of its graphic products and $240 for most individual programs. This is probably good value if you need the whole suite, but much less so for an individual program and many of these users are likely to look elsewhere.
I suspect that a realistic pricing level for subscriptions is probably no more than about $50 a year per user for a single program or (to follow Microsoft’s example) $100 a year for a comprehensive software bundle, but including business as well as home users. Even at that level there is no guarantee that customers will warm to subscriptions; Microsoft’s attempt to trial them in Australia around a decade ago ended in tears when people failed to understand that the subscriptions would expire after 12 months. Eventually Microsoft replaced all the subscriptions with perpetual licences.
I’d be interested in what people think about the attempts by established software companies to shift their customer base to subscription pricing. What are the benefits (if any) for users and whether and under what circumstances will this push succeed?